Case Law Details
Section 271AAA imposes an additional condition of the assessee having to substantiate the manner in which, the undisclosed income was derived. This requirement, however, must be seen as consequential to or corollary to the base requirement of specifying the manner, in which, the undisclosed income was derived. It is only when such declaration is made, the question of substantiating such disclosure or claim would arise.
If, as in the present case, the Revenue failed to question the assessee while recording his statement under section 132 (4) of the Act as regards the manner of deriving such income, the Revenue cannot jump to the consequential or later requirement of substantiating the manner of deriving the income. In the context of the requirement of the assessee specifying the manner of deriving the income the decision of this Court in case of Commissioner of Income Tax v. Mahendra C Shah 299 ITR 305 would hold the field even in the context of sub-section (2) of section 271AAA of the Act. It is only when the officer of the raiding party recording the statement of the assessee under section 132(4) of the Act elicits a response from the assesse’s this requirement, the assessee’s responsibility to substantiate the manner of deriving such income would commence. When the base requirement itself fails, the question of denying the benefit of no penalty would not arise.
Full Text of the High Court Judgment / Order is as follows:-
Revenue is in appeal against the judgment of the Income Tax Appellate Tribunal dated 21-11-2016 raising following question for our consideration:–
“Whether the Appellate Tribunal erred in law and on facts in deleting the penalty of Rs. 30,54,750 under section 271 AAA of the Act levied by the assessing officer?”
2. Brief facts are as under: —
A search action under section 132 of the Income Tax Act (‘the Act’ for short) was carried out in the group cases of the respondent-assessee on 8-12-2009. During such search, the assessee had made disclosure of Rs. 3,05,47,400 as undisclosed income. Subsequently, the return of income was filed in response to notice under section 153A of the Act declaring total income of Rs. 3,11,74,590. The assessee had also offered the income admitting the statement recorded under section 132(4) of the Act for taxation in the return filed for the assessment year 2010-11 and tax along with interest was also paid.
3. Despite such fact, the assessing officer proceeded to impose penalty under section 271AAA of the Act amounting to Rs. 30,54,750. The assessee, therefore, carried the issue in appeal before the Commissioner (Appeals). Commissioner (Appeals) deleted the penalty making following observations:–
“8. When the case of appellant is examined in view of this legal position, it is found that during the course of search he made disclosure of Rs. 3,05,47,400. Subsequently return was filed in response to notice issued under section 153A declaring total income of Rs. 3,11,74,590. Considering the facts of the case that undisclosed income has been admitted in the statement recorded under section 132(4) and the same has been offered for taxation in the return filed for assessment year 2010-11, tax along with interest thereon has been duly paid and no further question has been asked by the Department regarding manner of earning such income, I hold that levy of penalty under section 271AAA is not justified. Penalty of Rs. 30,54,750 is directed to be deleted. Grounds No.1 to 3 of the appeal are thus allowed.”
4. Revenue carried the matter in appeal before the Tribunal. The Tribunal, by the impugned judgment, dismissed the Revenue’s appeal relying on the judgement of this Court in case of Commissioner of Income Tax v. Mahendra C Shah 299 ITR 307. Hence, this appeal.
5. From the perusal of the orders on record, it becomes clear that the assessee had admitted the undisclosed income in his statement recorded under section132 (4) of the Act during the survey. The assessee had owned up to such income in the return filed and had also paid tax and interest on such sum. The assessing officer imposed a penalty on the ground that the assessee failed to substantiate the manner of earning the income. However, Commissioner (Appeals), as noted, concluded that no question was asked by the departmental representatives (in the course of recording the statement under section 132(4) of the Act) regarding the manner of earning such income. It was, on this basis, that the Commissioner (Appeals) as well as the Tribunal found that the assessing officer committed an error in imposing penalty.
6. As is well known, section 271, providing for penalty for concealment of income etc., contained an Explanation 5 inserted with effect from 1-10-1984 and held the field till introduction of Explanation 5A with effect from 1-6-2007. Under this Explanation 5, prevailing at the relevant time, an assessee could avoid payment of penalty on the assessee being found to be the owner of any money, bullion, jewellery or other valuable article or thing acquired by undisclosed income, if in the course of search, the assessee made a statement under sub section (4) of section 132 admitting acquisition of such asset out of his income not disclosed in the return and also specifies in the statement the manner, in which, such income has been derived and pays the tax together with interest in respect of such income.
7. To avoid penalty, with the aid of Explanation 5 therefore, the assessee had to make a statement under sub-section (4) of section 132 admitting such undisclosed income and specify in such statement the manner, in which, such income was derived and to pay tax tax, if any, on such income.
8. This provision came-up for consideration before Allahabad High Court in case of Commissioner of Income Tax v. Radha Kishan Goel 278 ITR 454. The Revenue was in appeal before the High Court challenging judgement of the Income Tax Appellate Tribunal. Grievance of the Revenue was that the assessee had not disclosed the manner of deriving such income. Despite which, the Tribunal had deleted the penalty. The High Court rejected the Revenue’s appeal primarily on the ground that a statement under section 132(4) of the Act is recorded by the departmental authorities and if in such statement no question is asked about the disclosure of manner in which the income is derived, the Revenue cannot impose penalty on the premise that the assessee did not make nay such disclosure. It was held and observed as under:–
“10. Under section 132(4) of the Act, it is the authorised officer, who examine on oath any person, who is found to be in possession or control of any books of account, document, money, bullion, jewellery or other valuable article or thing, therefore, it is on the authorised officer to record the statement in his own way. Therefore, it is not expected from the person to state those things, which are not asked by the authorised officer.
11. It is a matter of common knowledge, which cannot be ignored that the search is being conducted with the complete team of the officers consisting of several officers with the police force. Usually telephone and all other connection are disconnected and all ingrace and outgrace are blocked. During the course of search person is so tortured, harassed and put to a mental agony that he looses its normal mental state of mind and at that stage it can not be expected from a person pre-empt the statement required to be given in law as a part of his defence.
12. In these circumstances, we are of the view that under section 132(4) of the Act unless authorised officer puts a specific question with regard to the manner in which income has been derived, it is not expected from the person to make a statement in this regard and in case if in the statement the manner in which income has been derived has not been stated but has been stated subsequently, amounts to the compliance of Explanation 5(2) of the Act. We are also of the opinion that in case if there is nothing to the contrary in the statement recorded under section 132(4) of the Act, in the absence of any specific statement about the manner in which such income has been derived, it can be inferred that such undisclosed income was derived from the business, which he was carrying on or from other source. The object of the provision is achieved by making the statement admitting the non-disclosure of money bullion, jewellery etc. Thus, we are of the opinion that much importance should not be attached to the statement about the manner in which such income has been derived. It can be inferred on the facts and circumstances of the case, in the absence of anything to the contrary. Therefore, mere non-statement of manner in which such income was derived would not make the Explanation 5 (2) inapplicable.”
9. Similar situation arose before this Court. Division Bench in case of Commissioner of Income Tax v. Mahendra C Shah 299 ITR 305 adopted the same logic as that of the Allahabad High Court and observed as under: —
“15. In so far as the alleged failure on the part of the assessee to specify in the statement under section 132(4) of the Act regarding the manner in which such income has been derived, suffice it to state that when the statement is being recorded by the authorized officer it is incumbent upon the authorized officer to explain the provisions of Explanation 5 in entirety to the assessee concerned and the authorized officer cannot stop short at a particular stage so as to permit the Revenue to take advantage of such a lapse in the statement. The reason is not far to seek. In the first instance, the statement is being recorded in the question and answer form and there would be no occasion for an assessee to state and make averments in the exact format stipulated by the provisions considering the setting in which such statement is being recorded, as noted by Allahabad High Court in case of CIT v. Radha Kishan Goel (supra). Secondly, considering the social environment it is not possible to expect from an assessee, whether literate or illiterate, to be specific and to the point regarding the conditions stipulated by Exception No.2 while making statement under Section 132(4) of the Act. The view taken by the Tribunal as well as Allahabad High Court to the effect that even if the statement does not specify the manner in which the income is derived, if the income is declared and tax thereon paid, there would be substantial compliance not warranting any further denial of the benefit under Exception No.2 in Explanation 5 is commendable.”
10. It can thus be seen that this Court in case of Commissioner of Income Tax v. Mahendra C. Shah and Allahabad High Court in case of Commissioner of Income Tax v. Radha Kishan Goel (supra) have put considerable stress on the recording of the statement under section 132(4) of the Act in the context of the requirement of the assessee to disclose the manner in which the undisclosed income was derived in order to avoid penalty. The High Court in case of Commissioner of Income Tax v. Mahendra C. Shah, in particular, observed that considering the social environment, it is not possible to expect from an assessee to be specific and to the point regarding the conditions stipulated by exception No.2 while making statement under section 132(4) of the Act. The Court went on to observe that if the income is declared and tax is paid thereon, there would be substantial compliance.
11. It is this principle which the Commissioner (Appeals) and the Tribunal have applied in the present case. As noted, Commissioner (Appeals) was specific that no question was put to the assessee while recording statement under section 132 regarding the manner of deriving the undisclosed income. Counsel for the Revenue, however, vehemently contended that in the present case, the penalty was being imposed under section 271AAA of the Act and the statutory provisions enabling the assessee to avoid such a penalty are entirely different as compared to Explanation 5 to section 271.
12. Sub-section (1) of section 271AAA provides for a penalty in addition to tax at the rate of ten percent of the undisclosed income in case where the search has been initiated under section 132 of the Act on or after 1-6-2007 but before 1-7-2012. Such penalty may, however, be avoided if the conditions specified under sub section (2) are satisfied which are as under:–
(2) Nothing contained in sub section (1) shall apply if the assessee–
(i) in the course of the search, in a statement under sub section (4) of section 132 admits the undisclosed income and specifies the manner in which such income has been derived;
(ii) substantiates the manner in which the undisclosed income was derived; and
(iii) pays the tax, together with interest, if any, in respect of the undisclosed income.”
13. Sub section (2) of section 271AAA thus while retaining the other requirements of avoiding penalty as provided in clause (ii) of Explanation 5 has now introduced an additional requirement of the assessee having to substantiate the manner in which, the undisclosed income was derived. It is this requirement which the counsel for the Revenue would place great emphasis on. According to her, onus is now entirely shifted on the assessee not only to make a disclosure of the undisclosed income but also to specify the manner, in which, the income has been derived and to substantiate the same. It was therefore, contended that the earlier decisions of this Court in case of Commissioner of Income Tax v. Mahendra C. Shah and the decision of Allahabad High Court in case of Commissioner of Income Tax v. Radha Kishan Goel rendered in backdrop of different statutory provisions would not automatically apply.
14. We do not reject this contention totally. However, insofar as the facts of the present case are concerned, the field would still be held by the decision of this Court in case of Commissioner of Income Tax v. Mahendra C. Shah (supra). Sub-section (2) of section 271AAA imposes an additional condition of the assessee having to substantiate the manner in which, the undisclosed income was derived. This requirement, however, must be seen as consequential to or corollary to the base requirement of specifying the manner, in which, the undisclosed income was derived. It is only when such declaration is made, the question of substantiating such disclosure or claim would arise. If, as in the present case, the Revenue failed to question the assessee while recording his statement under section 132 (4) of the Act as regards the manner of deriving such income, the Revenue cannot jump to the consequential or later requirement of substantiating the manner of deriving the income. In the context of the requirement of the assessee specifying the manner of deriving the income the decision of this Court in case of Commissioner of Income Tax v. Mahendra C. Shah (supra) would hold the field even in the context of sub-section (2) of section 271AAA of the Act. It is only when the officer of the raiding party recording the statement of the assessee under section 132(4) of the Act elicits a response from the assesse’s this requirement, the assessee’s responsibility to substantiate the manner of deriving such income would commence. When the base requirement itself fails, the question of denying the benefit of no penalty would not arise.
15. Tax appeal is, therefore, dismissed.
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